Understanding trade tensions with China

Relations between China and the US represent the world’s most important bilateral relationship. And when it comes to trade, the state of the relationship has global consequences – especially to the supply chains that shape the production and distribution of goods in international commerce.

The value of Chinese exports is on the rise, with the country shipping goods worth USD 308.7 billion in August¹. But there are challenges on the horizon. The fear is that the results of the upcoming US presidential election could result in a tightening of the China trade restrictions that it has in place.

At the HSBC 11th Annual China Conference, an expert panel discussed how China’s trade ties with Europe and the US could develop over the coming years, with a focus on the barrier that has attracted the most attention in recent years: tariffs.

The impact of tariffs

Tariffs have been in place on certain Chinese goods since 2018. They were introduced by former President Donald Trump to address what he considered to be unfair trade practices by the Chinese. Retaliatory measures were introduced by China on select US goods. Despite being the signature trade policy of the Trump administration, they have stayed in place throughout President Joe Biden’s time in office.

Now that these trade barriers have been in place for more than half a decade, we are in a strong position to assess their medium-to-long term impact. The panel discussed how the effect of tariffs is very dependent on the sector a company operates in, as well as the options it has to modify its supply chain.

In fact, tariffs are not the main concern for US businesses operating in China, according to a recent survey from the US-China Business Council. The top challenge facing these companies is US-China relations, both from a geopolitical and domestic politics angle². Tariffs rank eighth, behind worries about the state of the Chinese economy, increased competition from domestic companies, as well as export controls and investment screenings.

The future of trade relations

Months ahead of the US presidential election, there are fears of a potential escalation in trade tensions. How policies will develop will depend on who emerges as the winner, said Mary Lovely, Anthony M. Solomon Senior Fellow, Peterson Institute for International Economics.

A Kamala Harris administration, she said, would likely lead to an increased focus on export controls. There were hopes that when Mr. Biden took office, he would rationalise the existing tariffs, but she suggested that there is now a political dimension to these trade barriers, with various interest groups making it hard to roll them back.

A Republican victory could present more dramatic change. She highlighted Mr. Trump’s proposal to implement a 60% tariff on Chinese imports to the US³, as well as a 20% tariff on the rest of the world (ex. China)⁴. One consequence of this kind of framework is that the introduction of a tariff that covers all countries is that it would make it harder for companies to use workarounds by trading via a third country.

The European angle

Policies impeding trade are not unique to the US. The EU has plans to add tariffs on Chinese imports of EVs, with the aim to protect local manufacturers. The duties could be as much as 37.6% . There have also been investigations into Chinese bidders for public tenders in European projects⁶.

“This does not mean that Europe is becoming more protectionist,” said Jörg Wuttke, Partner, DGA Group. “It is trying to be sure that companies on their home turf, who are not subject to subsidies, can compete on the same level as Chinese companies.”

There are also signs of caution among European companies doing business in China, due to a fall in the level of foreign direct investment. In 2023, FDI to China was EUR 6.4 billion, a 29% decrease on 2022, with a focus on automobiles, basic materials, and machinery⁷. Mr. Wuttke highlighted that much of the investment was coming from large companies, while small to medium-sized companies were more likely to hold back.

But despite the difficult backdrop of China’s trade relations with Europe and the US, the panel was broadly positive about the benefits provided by greater commerce between China and its western trade partners.

Noah Fraser, Senior Vice President, China Operations, US-China Business Council, for example, said that 80% of his organisation’s members were profitable in China, highlighting the opportunities on offer for foreign companies in the country.

Looking to the future, business parties on both sides will be hoping that relations can improve in the coming years.